Warburton's troubled Ten choices

One has to feel for James Warburton. Had he made a different choice last year he'd be running the top-rating television network in the country. Instead he's now battling, with scarce resources, to arrest the continuing implosion inside Ten Network.

The full-year results unveiled today look worse than they are, given that they were disfigured by $23.7 million of non-recurring items. With its core television revenues down 14.5 per cent and its earnings before interest, tax, depreciation and amortisation down 46.5 per cent, however, Ten is still struggling to gain some kind of stability.

The purported failure of its attempt to sell its outdoor advertising business to private equity for a total of $145 million ($25 million of it deferred) that was announced yesterday adds to the pressure on Warburton although, as discussed yesterday, the $200 million capital raising Ten made earlier this year has, with hindsight, proved absolutely vital.

Ten's response to its predicament, initially while Lachlan Murdoch was acting chief executive and now under Warburton, has been to try to cut costs and it has been relatively successful in doing so.

Overall costs were down 6.8 per cent – 7.5 per cent, or $42 million in the television business or about $12 million more than foreshadowed – but that $56.6 million of savings was overwhelmed by the 13.5 per cent, or $135 million, decline in revenue. Television revenue was down 14.5 per cent, or almost $124 million.

While Warburton is embarking on another strategic review to try to reduce costs further, it is apparent that Ten will only regain stability if it can improve its top line, which means improving its television product. There is too much operating leverage in the television business for Ten to be stabilised through cost-cutting alone.

Ten's problems are a mixture of the general environment – advertising markets generally have been under considerable pressure – and its own very poor ratings performance, which is a product of poor programming strategies and consequently inventory.

While Warburton tried to cast the network's on-screen performance in its best light – it has made some ground in the youth-oriented demographic segments it is targeting and its digital channels are showing audience growth – the reality is that its ratings and revenue shares have fallen relative to the other two commercial networks and it will require a new and more appealing slate of programs to reverse that. When even the ABC is challenging a commercial network for audiences, you know its problems are dire.

While Warburton said that, despite the cost-reduction programs, Ten will protect its ability to invest in programming, it is going to take a significant investment and considerable time to turn its performance around, if its performance is to be turned around.

Ten needs the proceeds from the sale of the EYE Corp business to give it a modicum of financial flexibility. It is still having discussions with Outdoor Media Operations, owned by funds managed by private equity firm CHAMP, so the prospect of a sale, albeit at a reduced price, is still alive.

The apparent end to the stand-off between Nine Entertainment's senior and mezzanine lenders yesterday, which should lead to a debt-free Nine, means that Ten will be up against two far more financially powerful and focused commercial rivals that are well aware of its vulnerability, adding to the degree of difficulty.

The equity raising earlier this year has at least reduced Ten's debt by $153 million, with net debt of $263 million at balance date compared with $416 million a year earlier. The impact of the equity raising should reduce its interest costs by about a third.

The market, however, is saying that it needs to go again to shore up its balance sheet risk and buy it the time to try to implement a successful renewal of its programming.

The make-up of its register and boardroom, which include Gina Rinehart, Lachlan Murdoch, James Packer, Bruce Gordon and Jack Cowin, means that there is some prospect that Ten could resort to another capital raising if the pressure continues to intensify, although even billionaires become wary of sending yet more good money after bad.